Merrimac Advisors Company and Fredric J. French

INVESTMENT COMPANY ACT OF 1940
Release No. 25356 / January 4, 2002

INVESTMENT ADVISERS ACT OF 1940
Release No. 2009 / January 4, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10594

The Securities and Exchange Commission (Commission) instituted this proceeding, pursuant to Sections 203(e), (f), and (k) of the Investment Advisers Act of 1940 (Advisers Act) and Section 9(b) of the Investment Company Act of 1940 (Investment Company Act) on September 27, 2001, with an Order Instituting Public Administrative and Cease-and-Desist Proceedings (OIP).

On November 30, 2001, the Division of Enforcement (Division) filed a Motion for Entry of Order Making Findings and Imposing Remedial Sanctions By Default Against Respondents Merrimac Advisors Company and Fredric J. French (Motion). The Division requests that a cease and desist order be entered against each Respondent and that they each be censured and ordered to pay a civil money penalty in the amount of $50,000. The Division further requests that Respondent French be barred from association with any investment adviser and that he be prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositer of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositer, or principal underwriter. The Division also requests that the registration of Respondent Merrimac be revoked.

Fredric J. French (French), individually and as president of Merrimac Advisors Company (Merrimac), has admitted he was served with the OIP by no later than October 30, 2001, in his pleading styled "Petition for Abatement" which was filed on October 30, 2001. By the terms of the OIP and Rule 220(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.220(b), answers were due twenty days from the date of service. The Commission has not received an answer from either Respondent.

Pursuant to Rules 155(a) and 220(f) of the Commission's Rules of Practice, 17 C.F.R. §§ 201.155(a) and .220(f), a respondent who fails to answer, respond to a dispositive motion within the time provided, or otherwise defend the proceeding may be deemed to be in default. The administrative law judge may then determine the proceeding against him upon consideration of the record, including the OIP, the allegations of which may be deemed to be true.

Respondents are in default within the meaning of 17 C.F.R. § 201.155(a). They failed to answer the allegations in the OIP or to respond to my Order To Show Cause issued on December 3, 2001, which ordered Respondents to show, by December 20, 2001, why they should not be held in default and sanctioned as the Division requests. See 17 C.F.R. §§ 201.155(a) and .220(f). Accordingly, I find that the allegations in the OIP are true.

1. At all relevant times, French, age 52 and a resident of Albuquerque, New Mexico, was an associated person and the only principal of Merrimac.

2. French founded Merrimac in late 1996. From 1996 through 1998, Merrimac managed securities portfolios for one mutual fund, one individual and a few pension and retirement funds.

3. Before he formed Merrimac, French worked for Lakeview Securities Corporation (Lakeview), a registered broker-dealer and investment adviser, which is an affiliate of Performance Analytics, Inc. (Performance), a registered investment adviser. Lakeview hired French in 1993 to assist in the management of the portfolio of Investors Research Fund, Inc. (IRF), an open-end investment company for which Lakeview acted as an investment adviser. French, as an employee of Lakeview, assisted in the management of the IRF portfolio from January 1994 until he formed Merrimac in late 1996.

4. Merrimac, through French, gave approximately ten to twelve presentations to prospective clients from March 1997 through early 1998.

5. French made his presentations on behalf of Merrimac to clients of Performance. Performance provides consulting services to its clients, who are primarily corporate pension funds, profit sharing plans, and wealthy individuals. Performance does not manage client funds. Instead, Performance provides consulting services to its clients by assisting them in defining their objectives and in selecting and retaining money managers. For each of its presentations to Performance clients, Merrimac made the presentation in competition with other money managers selected by Performance. Through these presentations, Merrimac obtained three clients.

6. Merrimac obtained clients partly by using a false track record in the presentations made to Performance clients. For each of Merrimac's presentations, Performance provided its clients with a Management Report including performance data for Merrimac's portfolio of funds under management for the preceding five-year period. According to these Management Reports, Merrimac had a cumulative annual rate of return ranging from 20.2% to 20.5% for its portfolio which substantially exceeded the performance of the S & P 500 index during the same time period. These performance numbers placed Merrimac's portfolio in the highest 2% of all of the money managers in the Performance database. In addition, these Management Reports frequently included a single-page synopsis of each investment adviser called a Manager Watch. The Manager Watch for Merrimac stated that Merrimac managed $200 million of client funds for ten clients and was founded in 1993. In addition, the Manager Watch contained graphs and charts providing and analyzing Merrimac's cumulative annual rate of return for the previous five years. The Manager Watch was based on information that French and Merrimac provided to Performance. Merrimac also provided each prospective client with a brochure. These brochures contained a summary of Merrimac's investment methodology and contained the same performance data for Merrimac described above.

7. The information concerning Merrimac's track record that was provided to Merrimac's clients and prospective clients was false. Merrimac did not have a five-year track record of obtaining annual returns greater that 20% for its clients. Merrimac began conducting business in early 1997, not 1993 as represented to Performance clients. The representations that Merrimac had ten clients and $200 million dollars under management were also false. At its zenith, Merrimac had only five clients and around $90 million in client funds under management.

8. French exclusively controlled the operations of Merrimac at all relevant times. Accordingly, French knew that the information about Merrimac's track record as an investment adviser, which was provided to Merrimac's clients and prospective clients, was false.

9. Merrimac and French failed to make and keep true, accurate and current records and documents necessary to form the basis for, or demonstrate the calculation of, the performance or rate of return of client accounts or recommendations referenced in any advertisement or other communication to ten or more persons.

10. During the time period from at least March 1997 through 1998, based on the conduct above, Merrimac and French committed or caused violations of, and willfully violated, Sections 206(1) and 206(2) of the Advisers Act. Further, during the time period from at least March 1997 through 1998, based on the conduct above, French caused and willfully aided and abetted Merrimac's violations of Sections 206(1) and 206(2) of the Advisers Act. Sections 206(1) and 206(2) of the Advisers Act prohibit an investment adviser from employing any device, scheme, or artifice to defraud or engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. As a part of this conduct, clients and prospective clients of Merrimac were provided with false performance information for Merrimac, and were misled as to the amount of assets under management and the number of Merrimac's clients, as described in paragraphs 4 through 8 above.

11. During the time period from at least March 1997 through 1998, based on the conduct above, Merrimac committed or caused violations of, and willfully violated 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder and French caused and willfully aided and abetted those violations. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging "in any act, practice, or course of business which is fraudulent, deceptive or manipulative," as defined by the Commission by rule. The Commission adopted Rule 206(4)-1(a)(5) which states that, "[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of Section 206(4) of the [Advisers] Act for any investment adviser . . . directly or indirectly, to publish, circulate or distribute any advertisement . . . which contains any untrue statement of material fact, or which is otherwise false or misleading." As a part of this conduct, clients and prospective clients of Merrimac were provided with false information for Merrimac, and were misled as to the amount of assets under management and the number of Merrimac's clients, as described in paragraphs 4 through 8 above.

12. During the time period from at least March 1997 through 1998, based on the conduct above, Merrimac committed or caused violations of, and willfully violated Section 204 of the Advisers Act and Rule 204-2(a)(16) thereunder and French caused and willfully aided and abetted those violations. Section 204 of the Advisers Act requires registered investment advisers to make and keep certain records which are subject at any time to inspection by the Commission's staff. Pursuant thereto, the Commission adopted Rule 204-2(a)(16) which requires that investment advisers maintain copies of all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for, or demonstrate the calculation of, performance or rate of return for managed accounts or securities recommendations referenced in advertisements or other communications circulated to ten or more persons. As a part of this conduct, Merrimac and French failed to make and keep true, accurate and current records and documents necessary to form the basis for or demonstrate the calculation of performance or rate of return of client accounts or recommendations referenced in Merrimac's advertisements or other communications circulated to clients, as described in paragraphs 4 through 9 above.

On the basis of the foregoing, IT IS HEREBY ORDERED that it is appropriate in the public interest to impose the following sanctions:

A. IT IS ORDERED, pursuant to Section 203(k) of the Advisers Act, that Respondents French and Merrimac cease and desist from committing or causing any violations and any future violations of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-1(a)(5) thereunder;

B. IT IS FURTHER ORDERED, pursuant to Sections 203(e) and 203(f) of the Advisers Act that Respondents French and Merrimac be, and hereby are, censured;

C. IT IS FURTHER ORDERED, pursuant to Section 203(e) of the Advisers Act, that the registration of Respondent Merrimac be, and hereby is, revoked;

D. IT IS FURTHER ORDERED, pursuant to Section 203(f) of the Advisers Act, that Respondent French be, and hereby is, barred from association with any investment adviser;

E. IT IS FURTHER ORDERED, pursuant to Section 9(b) of the Investment Company Act, that Respondent French is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositer of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositer, or principal underwriter; and

F. IT IS FURTHER ORDERED, pursuant to Section 203(i) of the Advisers Act, that Respondents French and Merrimac each pay a civil penalty in the amount of $50,000, within twenty-one days of the issuance of this Order. Such payment shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) hand delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover of letter which identifies French and Merrimac as respondents in this proceeding, a copy of which letter and money order or check shall be sent to Mary Keefe, Regional Director, Midwest Regional Office, Securities and Exchange Commission, 500 West Madison, Suite 1400, Chicago, Illinois 60661.

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Robert G. Mahony
Administrative Law Judge